Schrödinger Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 14 speakers on the call.

Operator

Thank you for standing by. Welcome to Schrodinger's Conference Call to review First Quarter and 2024 Financial Results. My name is Chloe, and I'll be your operator for today's call. Please be advised that this call is being recorded at the company's request. Now I would like to introduce your host for today's conference, Ms.

Operator

Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our Q1 2024 financial results. Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer Jeff Porges, Chief Financial Officer and Karen Akinsanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q and A.

Speaker 1

During today's call, management will make statements that are forward looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitation statements related to our outlook for the Q2 and full year 2024, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs the timing of, initiation of and readouts from our clinical trials the clinical potential and properties of our compounds the use of our cash resources and our future expenses. These forward looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially due to a number of important factors, including the considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC, including our Form 10 Q for the quarter ended March 31, 2024. These forward looking statements represent our views only as of today, and we caution you that except as required by law, we may not update them in the future, whether as a result of new information, future events or otherwise.

Speaker 1

Also included in today's call are certain non GAAP financial measures. These non GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures. Please refer to the tables at the end of our press release, which is available on our website for reconciliations of these non GAAP measures to the most directly comparable GAAP measures. With that, I'd like to turn the call over to Ramy.

Speaker 2

Thanks, Sharon, and thank you everyone for joining us today. We are pleased with the start of the year, delivering revenue growth in line with our expectations and continuing to advance our proprietary pipeline. As you will hear from Karen, our first two clinical programs are progressing in Phase 1 clinical studies and today we announced IND clearance for SGR-three thousand five hundred and fifteen, our Wee-one MIP-one inhibitor. Total revenue for the Q1 was 30 $6,600,000 with software revenue totaling $33,400,000 and we are reiterating our full year guidance. We are in active discussions with multiple global and emerging biopharma companies about increasing adoption of our platform.

Speaker 2

While it is too early to predict the magnitude of scale up from customers with renewals in the remainder of the year, we continue to see high teams incorporating computation at scale into molecular discovery programs. Today, we reported that rights to the SARS-one inhibitor discovered and developed as part of the collaboration with BMS has referred to us based on portfolio prioritization decisions. Collaborations are an important part of our business and we are routinely assessing opportunities with existing and new collaborators and partners. Our venture activity has also been a very successful part of our overall strategy, validating our platform and strengthening our balance sheet with both cash distribution and equity from companies we have co founded. We have been pioneering computational molecular discovery for over 30 years and continue to push new frontiers integrating physics and machine learning to extend our scientific and commercial leadership position in the industry.

Speaker 2

We have a bold vision of structurally enabling every protein in the human genome with an initial focus on the most important off targets known to cause serious side effects that derail clinical programs. There is an emerging requirement for such models to predict drug toxicity risks before animal or human studies. We are very actively developing computational solutions to meet these requirements. Our recent advances characterizing the structure of key proteins such as HERD and cytochrome P450 enzymes are examples of these efforts. We've also extended our informatics platform and in March we launched a new version of Live Design that supports biologics.

Speaker 2

Live Design is an enterprise cloud based solution that allows drug discovery teams to centralize access to computational modeling tools and data in a single interface. Live Design previously only supported small molecules and we are pleased to expand our informatics capabilities to support biologics. We are well positioned to advance all aspects of our business this year. We see clear opportunities to drive software adoption, to extend our scientific leadership in the industry and to advance our clinical programs towards multiple data readouts. I will now hand the call over to Jeff.

Speaker 3

Thank you, Rami, and good afternoon, everyone. Shortening had a solid Q1 with software revenue meeting our expectations. A handful of software renewals were bumped into Q2 from Q1 and reduced some of the upside opportunities for the quarter, but we should see the benefit of these in Q2 and the balance of the year, underpinning our confidence in our full year revenue growth guidance. Our business in China has been below our expectations this year based on the challenging commercial environment there, but we have many opportunities to offset that impact with larger renewals in the U. S.

Speaker 3

And Europe. We continue to enhance the capabilities of our software and see multiple paths to secure multimillion dollar increases in contract size at global and emerging biopharmaceutical companies in 2024 and beyond. We are also very excited to have advanced our our proprietary portfolio to now have a 3rd program entering the clinic, and we are within sight of our first clinical data for our proprietary programs in patients later this year or in 2020 5. Finally, the return of our SARS-one program from BMS gives us another opportunity to evaluate for our proprietary portfolio and to consider for external partnership and combination development opportunities. In Q1, software revenue was $33,400,000 an increase of 4% compared to Q1 last year.

Speaker 3

Q1 last year benefited from a significant revenue contribution from multiyear renewals that did not recur in Q1 this year. Hosted software revenue was 22% of total revenue and grew more than 60% compared to Q1 2023. The faster growth in hosted software was in line with our expectations and consistent with our prior comments about an anticipated gradual transition to hosted software licenses across our customer base over a number of years. Maintenance and professional services were relatively constant as new service and maintenance agreements largely offset the negative effects of projects that were completed or transitioned to hosted licenses. Drug Discovery revenue was $3,200,000 in the quarter compared to $32,600,000 in the same quarter last year.

Speaker 3

The Q1 of 2023 included a large collaboration milestone payment associated with the progression of a collaboration project with BMS. We continue to expect our drug discovery revenue to be variable from quarter to quarter due to the timing of milestones and challenging the forecast given uncertainty about partner decisions and about the timing and value of new business development activity. Total revenue was $36,600,000 in Q1 compared to $64,800,000 in Q1 of 2023. The difference was due to drug discovery revenue. Our cost of software revenue was $8,000,000 compared to $7,100,000 in Q1 2023.

Speaker 3

The increase was mainly due to higher technology costs. Our software gross margin was 76% for the quarter compared to 78% in Q1 2023, also mainly due to higher technology expense. Our cost of drug discovery revenue was $9,700,000 compared to $12,000,000 in Q1 2023. The decrease in the cost of drug discovery was due to the shift in allocation of staff from collaboration to proprietary programs and also lower CRO expenses for collaboration programs. Our drug discovery margin was negative compared to a profit in Q1 2023 when the quarter benefited from a single relatively large milestone payment from BMS.

Speaker 3

Overall, our gross margin was 52% compared to 71% in Q1 2023. The decline was driven by lower drug discovery revenue. Turning to operating expenses. R and D expense was $51,000,000 compared to $41,000,000 in the same period of 2023. Most of the increase was for our therapeutics R and D and was partly driven by changing allocation between our collaboration investments in our proprietary programs as well as by higher headcount and higher CRO expenses.

Speaker 3

Overall, Platform and Therapeutics R and D continued to be approximately balanced in their contributions to our total R and D. Sales and marketing expense was $10,200,000 for the quarter and increased by 11% compared to the prior year. The increase was mainly due to high headcount and associated costs. G and A expense was $25,500,000 in Q1 2024 and decreased slightly compared to the same period a year ago. The decrease was due to royalty payments associated with the Nimbus distribution in Q1 2023, which flows through G and A by accounting convention.

Speaker 3

Net of this effect, underlying G and A expenses increased by approximately 5%, mainly due to higher FTE expenses. Total operating expenses were $86,000,000 in Q1 2024 compared to $76,000,000 in the same period in 2023. The increase was mainly due to higher R and D. For the quarter, our operating loss was $67,000,000 compared to $31,000,000 in the same period a year ago. Change in fair value of equity method investments was $8,100,000 compared to $35,700,000 in Q1 2023.

Speaker 3

The change into Q1 2024 which are the changes in the value of our equity ownership in Structured Therapeutics and Morphic during the quarter. In the same period in 2023, the change in fair value was driven by the change in valuation of our ownership position and structure associated with their successful IPO. Other income consisted of $5,000,000 in Q1 2024, mainly consisting of interest on a cash balance in Q1 twenty twenty three. Other income was $2,900,000 Gain on equity method investments was 0 in Q1 2024 compared to $147,000,000 reported in Q1 2023, driven by the Nimbus distribution. Total other expense or income was $13,200,000 in Q1 2024 compared to $186,000,000 in Q1 2023.

Speaker 3

Our loss before taxes was $54,300,000 compared to a pretax profit of $155,000,000 in Q1 2023. Our tax expense in Q1 2024 was $500,000 compared to $26,000,000 of tax expense in Q1 last year. Our net loss per diluted share was $0.76 in Q1 2024 compared to a profit of $170,750,000 in Q1 2023. On a non GAAP basis, excluding gains and changes in fair value for equity method investments, our loss per share was $0.86 in Q1 2024 compared to a loss of $0.39 per share in Q1 2023. Our cash used in operating activities was $39,000,000 in Q1 2024 compared to $31,000,000 in Q1 2023, and our total cash and marketable securities balance declined by $33,000,000 in Q1 as our operating cash was offset by $7,600,000 in cash realized by from the sale of equity during the quarter from our ATM.

Speaker 3

At the end of Q1, we had $436,000,000 in cash and marketable securities compared to $469,000,000 at the end of Q4 2023. Our previously provided financial guidance for the year is unchanged. We are confident about the outlook for our software business and see multiple opportunities for significant step ups in contract size at many of our customers. We are encouraged by the interest and opportunities in front of our drug discovery business and by the potential of our proprietary medicines. And we believe the trajectory of our expenses and cash use this year are consistent with our original expectations.

Speaker 3

For Q2 2024, we expect our software revenue to be in the range of $31,000,000 to $33,000,000 I'll now turn the call over to Karen to comment on our therapeutic R and D.

Speaker 4

Thank you, Jeff, and good afternoon, everyone. Our therapeutics team continues to advance our pipeline of collaborative and proprietary programs. With the IND clearance of SGR-three thousand five hundred and fifteen, our V1, NIT1 inhibitor, we now have 3 clinical stage proprietary programs. In addition to our proprietary pipeline, several collaborative programs are advancing in clinical trials at companies we have co founded or partnered with, providing continued validation of our platform. As Rami reported, we have received full rights to the Sos 1 development candidate that we discovered as part of our collaboration with BMS.

Speaker 4

As you know, BMS acquired a clinical stage SUS 1 inhibitor when it completed its acquisition of a clinical stage oncology company earlier this year. We received transfer of information from The transfer of information from BMS to Schrodinger is ongoing. We will determine the next steps and plans for further investment in this program based on our assessment of the context of our overall proprietary portfolio and the evolving therapeutic landscape. As we look ahead, we expect collaborations to continue to be an important component of our portfolio, and we continue to evaluate new partnerships where the science, project scope and value are consistent with our strategy. Turning to SGR1505, our MORT1 inhibitor.

Speaker 4

Our Phase I study in patients with relapsed refractory B cell lymphomas is progressing well. We've expanded the study to 15 sites globally and dose escalation is ongoing. As a reminder, the primary objectives of the study are to evaluate the safety tolerability of PKPD and determine the recommended dose. Measures of clinical activity are secondary endpoints. We are on track to have clinical data in late 2024 or in 2025.

Speaker 4

Our CEC7 inhibitor, SGR-two thousand nine hundred and twenty one, is also advancing in a Phase I dose escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome. The study is progressing well with multiple dose escalation steps completed, and we also expect to report initial data from this trial in late 2024 or 2025. Today, we announced that we received FDA clearance of our IND for SGR-three thousand five hundred and fifteen, our V1 MYP-one inhibitor. Our preclinical data package demonstrated that SGR-three thousand five hundred and fifteen exhibited sustained tumor growth inhibition while maintaining a favorable safety profile using an intermittent dosing schedule. Activities are underway to open clinical study sites, and we expect to begin patient enrollment in the 3rd quarter.

Speaker 4

The Phase I study is designed to evaluate the safety of PKPD and establish a recommended dose for SGR-three thousand five hundred and fifteen in patients with solid tumors. The study population will include patients with advanced solid tumors predicted to be sensitive to VEI or VEI1 inhibition, including breast cancer, ovarian cancer, uterine cancer and solid tumors with elevated replication stress. In addition, we are advancing several discovery programs in areas of high interest, including inhibitors of EGFR, C797S, PRMT5 NTA and NLRP3. We have identified potent selective inhibitors that may have become product profile design challenges observed across other programs. We are on track to select development candidates to support an additional IND submission in 2025.

Speaker 4

In our collaborative portfolio, we are excited about the progress we have made in identifying oral small molecule inhibitors for targets previously addressed by antibodies or that required intravenous administration, and we anticipate advancing early stage proprietary modality switch programs across multiple disease areas. In summary, we are pleased with the progress we are making across our collaborative and proprietary pipeline with Phase 1 studies of SGR 1505 and 2921 advancing and 3,515 poised to enter the clinic this year, we are excited to be advancing towards clinical readouts and inflection points from 3 programs. Behind our clinical stage programs, we have a next generation of molecules with opportunities to generate value through partnerships, new ventures or by advancing them independently. We are excited about our 1st in class and best in class opportunities within our portfolio and look forward to updating you on our progress in the coming months. I'll now turn the call back to Rami.

Speaker 2

Thank you, Karen. As you heard, we are off to an excellent start this year and are continuing to make progress against our goals for the year. We appreciate the hard work and commitment of our employees who are instrumental to our mission. We look forward to providing further updates throughout the year. At this time, we'll open the lines for questions.

Operator

And we'll take our first question from Michael Yee with Jefferies. Your line is open.

Speaker 5

Hey, guys. Thank you for the question and thank you for the update. Question on software and question on the pipeline. On the core business, I think Jeff Port just made a comment about how some business was maybe pushed from Q1 to Q2. Can you talk a little bit about that?

Speaker 5

And how that relates to ongoing trends appreciating that Q4 still is really your biggest quarter. So just comment on some of that dynamic. And then on the pipeline, maybe for Karen, can you talk about the MALT-one study going on and what you would deem to be positive and very promising efficacy for a new small molecule for B cell lymphomas? Thank you.

Speaker 6

Great. Hi, Mike. Just on the contracts that I mentioned, there were a couple of relatively small contracts that were really the difference between the core meeting our expectations and then being a little bit lighter. I don't think it reflects any underlying trends in the business. These were contracts that we knew were renewals and for logistics reasons, they didn't renew at the very end of Q1 and they've tipped into Q2, we don't think that there's any there's no increase in the number of non renewals or anything like that.

Speaker 6

We continue to have very high conviction about the outlook for the full year and just don't see anything in the external environment that affects that outlook. I did highlight the effects in China. Our business underlying business in China is relatively small. It's the smallest of our geographies. And given what's going on there, perhaps not a surprise that the renewals there have dropped off somewhat, but it's not going to have a big impact.

Speaker 6

And the big driver for us is I highlighted those large renewals that will tend to be concentrated in the Q4.

Speaker 7

And Mike on the MORT1 mechanism, as you're aware, we're obviously in our Phase 1 dose escalation trial. I think your question was broader than that with respect to the mechanism. We see this as a clinically validated mechanism given data that's been published over the last few years showing monotherapy responses in the range of 28% ORR and combination activity in combination with BTK giving you around 70% ORR. We also know that there were complete responses in prior trials. So in terms of what we think would be exciting, obviously, solid therapy activity, but also combination activity either with BTK inhibitors or with BCL2 inhibitors and we showed a lot of that pre clinically.

Speaker 7

But in pre clinically, you can get to regression. And so we hope to see similar data emerging from the MOB-one mechanism over the coming years.

Speaker 5

Very good. Thank you.

Operator

And we'll take our next question from David Lebowitz with Citi. Your line is open.

Speaker 8

Thank you very much for taking my question. Could you comment on I mean, Michael, to some extent, got on this, but on the trends that we should expect, I know there was an effort to try to shift the nature of contracts to move revenues, I guess, to be a little bit more smoothed out. It would result in them smoothing out somewhat more. How are those efforts progressing? And how should we see that take hold?

Speaker 6

Yes. Thanks very much for the question, David. Indeed, we are seeing some transition over to hosted for on prem. You can see it in the breakout in the Q. The hosted in this most recent quarter grew by 20 by 16% year over year and was now 21% of total software revenue, whereas in the Q1 of last year, it was only 14% of software revenue.

Speaker 6

It was much more percentage in the Q4. So when we do have these large quarters with multiyear contract renewals, then the hosted proportion is going to go down. However, the long term trend is that we think that the proportion of business that's hosted will gradually increase. And we did have a number of significant customers switch over from on prem to hosted last year. Now as we've said, our business has been around selling software for nearly 30 years, that's longer than that, way before my history with the company.

Speaker 6

But we have complex contracts and every contract is different. They have to be honest like snowflakes. And so we can't go in and sort of immediately change all of those contracts over, but we do think that over a number of years that proportion from hosted will continue to increase. It won't be rapid sudden or single year transition, but we do think that it will increase over time.

Speaker 9

Thank you for taking my question.

Operator

And we'll move next to Scott Schoenhaus with KeyBanc. Your line is open.

Speaker 10

Hi, team. Could you give us an update on what you're seeing on the biotech end markets? We've had some peers in the space that have noted potentially some recovery or it's mixed commentary. So I wanted to hear from what you guys are seeing and then remind us what's baked into your guidance in terms of the biotech end markets? Thanks.

Speaker 6

Sure. Scott, last year, we did highlight that there was an increase in the number of small companies that were non renewing. You could see that in the KPI data that we provided in the companies in the tier between $100,500,000 of ACV, our bill is an increase in the loan renewals in that tier. We don't provide quarterly ACV numbers or quarterly bookings numbers, but we've seen a stabilization of that trend. We're not seeing any sort of continued increase in the number of non renewals.

Speaker 6

That being said, we aren't seeing an offsetting increase in the new inquiries. But I will say we're seeing companies coming forward that are venture backed who are asking are there any creative ways they can get access to our software. And when engaging in those discussions, we do think over time they will result in software contracts. It may take longer than we normally would have expected perhaps back in 2020 or 2021 to see that realized into our results, but we're hearing about those opportunities coming forward. So I would still characterize it as green shoots rather than anything that we can harvest, but we're definitely seeing some of those opportunities.

Speaker 11

Thank you.

Operator

And we'll move next to Vikram Parulhut with Morgan Stanley. Your line is open.

Speaker 9

Hi, good afternoon. Thanks for taking our questions. So we had 2, 1 on the pipeline and then one on the full year software guidance. So on the pipeline, at what point do you think there might be some more visibility available on specifically when in late 2024 or 2025 data could come through for MOL1 and CDC7? And how are you currently thinking about what the initial size and scope of that data set could be?

Speaker 9

And then on the software guidance for the year, with 1Q behind us now, how are you now thinking about which scenarios define the bookends of your guidance of 6% to 13% year over year growth? Thanks.

Speaker 7

So I can start. So I think it's too early to commit to specific data that we're going to be sharing. As you know, this is a dose escalation trial with respect to safety, PK and PD. Our goal is to determine the recommended Phase 2 dose and clinical activity is a secondary end point. However, we are gathering more PK safety and ED data in the trials that we're running.

Speaker 7

And so that's ongoing. It's going well. And so over the course of the period that we've shared, 2024 through 2025, we will be in a position to share an update, but it's too early to give you any color on what that might look like at this time.

Speaker 6

Vikram, let me jump in and give you an answer on your second question about the full year guide and the circumstances that would lead us to either of the bookings. First of all, to just remind you, the guidance philosophy is to guide to the range of most likely outcomes. We don't try and guide to either extremes or very low probability outcome either on the high side or the low side, but we do want to share with you what we think is most likely. And the range we provided is that range right now. We do think we'll get more information as we progress through the year.

Speaker 6

And of course, ultimately, we'd hope to narrow that range, but we don't know what until we get that information, we'll have to incorporate it. In terms of the circumstances that would drive us to either of those extremes, it does depend to a substantial degree on the nature of the renewals. For example, if we have customers who are on prem customers who come to us and ask to renew on a multiyear basis that would drive revenue towards the high end of the guidance range. If they come forward and say we want to renew as we already have on annual contract basis, then it would be more to the low end of the range. The other factor that we're considering in the guidance that we provide is some of the conditions that we discussed in terms of the biotech financing environment.

Speaker 6

If we see some of those conversations about providing our software to relatively early stage companies come to fruition and if those companies successfully finance and that might trigger a revenue purchase that would also contribute to driving us towards the upper end of the range. So those are the 2 variables that we're mainly contemplating. I hope that's helpful.

Speaker 9

It is. Thank you.

Operator

And we'll take our next question from Evan Seigerman with BMO. Your line is open.

Speaker 9

Hi, there. This is Connor McKay on for Evan. Thanks for taking our question and congrats on the IND approval for 3,515. With a number of assets either in clinic or soon to be in clinic, can you just talk a bit about how you're thinking about P and L management as it relates to your broader business? And then also how are you thinking about the potential for collaborations and partnerships with your internal assets, of course, balancing data maturity and preserving economics?

Speaker 9

Thank you.

Speaker 11

Okay. Any collaborations for

Speaker 6

Sure. Yes. That's

Speaker 11

probably a good way to

Speaker 7

Yes. So I can just start by saying each of the is going to lead is going to lead to deeper responses. As you're well aware, we don't have those mechanisms. For example, BCL-two, BTK inhibitors. And we view collaborations as an important way to basically combine our assets with other companies' products or development assets to recognize the opportunity for these programs in various different indications.

Speaker 7

So we're very open to collaboration. We continue to be in those discussions. But obviously, we're gathering important data on all of these programs at the moment.

Speaker 6

And, Tom, let me just add to that on collaborations. It is a very dynamic deal environment for companies in the computational drug discovery space generally. And that dynamic environment, I think, is to our advantage and we do see a lot of opportunities for a wide variety of different types of deals as we contemplate the business broadly above. Now, I've said previously, we aren't guiding to that. We can't really forecast timing, value, probability of those discussions.

Speaker 6

That dynamic environment is to our benefit. In terms of your first question about P and L management, assuming that you're asking us about the trajectory of expenses, while we haven't guided to expenses for next year, I hope that we've been communicating consistently that we are seeing a slowing in growth rate of a number of our different expense drivers. We think that we have opportunities to see slight improvements in our gross margin, for example, that you're seeing some operating leverage now on our G and A line, you're seeing some operating leverage on sales and marketing as well. And we think that our R and D, while it has been increasing and it's likely to continue to increase, is going to increase significantly more slowly than it has in the past because the there will be additional capital required for the advancing clinical programs. But relative to the totality of our R and D, which is still substantially for the platform, it's a relatively small contribution.

Speaker 6

So we don't think it's going to drive a large increase in our R and D requirements going forward. I hope that's clear.

Speaker 9

Great. Thank you.

Operator

We'll move next to Stephen Ma with TD Cowen. Your line is open.

Speaker 9

Great. Thanks for the questions. I've got one on live design for biologics. Could you give us some color on the adoption and any traction with customers you've gotten since launch in March? And then specifically, what types of companies are making inquiries?

Speaker 9

Are they big pharma or emerging biotechs?

Speaker 11

Yes. So we just launched it. But as with many of our launches, including Live Design itself, we worked very closely with a number of companies to understand the requirements and what they would want in the product. So the feedback so far in all of the presentations that we've given before the launch actually and since the launch has been incredibly positive. There is clearly sort of pent up demand for something like this.

Speaker 11

There is not a good solution right now. So significant interest, but this is a very new release. So we can't comment on anything about the number of customers that are revenue from it, but we're really excited about the launch. And it's going well so far.

Speaker 9

Okay, great. That's fair enough. And then I got one last question on the SARS-one inhibitor that reverted back to you guys from DMS. I appreciate the color on why they didn't take the option that they acquired a company with a similar asset. But do you know how similar that asset that BMS acquired is to the inhibitor that you guys developed?

Speaker 9

Is it how similar is it the same mechanism? Thank you.

Speaker 7

Yes. I mean, I think from a mechanism point of view, this is a PPI inhibitor. I think that mechanistically, they're both very similar. I will say that obviously we were in a position to benchmark our compound during the discovery phase of the program that we ran with BMS. And we're very happy, I would say, with the profile of the compound and BMS brought that program in on the basis of the work that we had done.

Speaker 7

So we remain excited about the molecule. I think obviously that molecule that they acquired through their acquisition is more advanced than ours. And so we have obviously work ahead of us to as an industry actually to see how all these softphone compounds compare. And so yes, I think it's too early obviously to say how they stack up against each other in the clinic.

Speaker 9

Okay, got it. And how long do you think the evaluation will take, the internal evaluation and what to proceed with it? Thank you.

Speaker 7

It's a little hard to determine. We obviously are very early in the process of getting data back from BMS from the IND enabling studies they have been conducting. So I can't say exactly, but I think we're in a hurry to understand the opportunity here. And again, we're excited about the profile and what we've seen so far. So hopefully it won't take too long.

Speaker 9

Okay, great. Thanks for the questions.

Operator

We'll move next to Michael Ryskin with Bank of America. Your line is open.

Speaker 12

Great. Thanks for the questions guys. First, I want to just follow-up on exactly that last point, the BMS discontinuation. In the past, I think when you've had some programs sent back, there might be a milestone fee or some sort of financials associated with it. I'm just curious, was anything like that recognized in the Q1?

Speaker 12

Or do you expect it in the Q2? Just any other details around the process of reverting those rights?

Speaker 6

Okay. Hi, Mike. Short answer is no. Because this program had transitioned their portfolio and we had that milestone from it previously with associated with that transition, there isn't any additional milestone or fee payable on being returned to us, nor do we have any prior revenue that we accelerate. So it wasn't a contributing factor in Q1.

Speaker 12

Okay. Easy to answer. Thanks. And then for my follow-up, it's been I think a couple of quarters since you guys really talked about the material science part of the portfolio, so I thought I'd ask on that. Just any updates there, anything interesting to keep us to a process of I know it's always sort of in the background and doesn't get a ton of light, but I just figured we'd see if there's anything new going on there.

Speaker 12

Thanks.

Speaker 11

Sure. Yes. So the thing that we're most excited about on the Material Science side is, as we've talked about before, is we have this collaboration with Gates, that was the initial project was a 3 year project. It went so well that it was actually renewed and that was on the basis of really progress on the science. This is a really, really hard problem.

Speaker 11

And as with all really hard problems, we think success in the problem will have significant rewards. So we're really pleased with the progress on the basic science, but that's really the stage that we're at. And that's what we're really excited about. We think if we're successful in the project, as I said, it has the potential to have a really big impact. As far as the core business and the revenue for the business, as we said before, we don't really break that down.

Speaker 11

We're pleased with the progress that continues to we continue to add new customers. There continues to be scale up of other customers, but we're not really disclosing we're not breaking down the revenue into the different components. I hope that answers the question.

Speaker 9

Okay. Yes. Thank you.

Operator

We'll take our next

Speaker 13

Maybe first up, and this kind of goes back to Jeffrey, some of your comments about the R and D expense kind of leveling off a little bit. As we look out over this year and maybe into next year, you've got a couple of Phase 1 trials that will be wrapping up. And then you've got we want obviously kind of kicking off. Is that part of the flattening of the R and D expense over the next, call it, year, year and a half? Or is it more a function of kind of looking at those programs and trying to figure out where do we go next and which one do you want to kind of move on to Phase 2?

Speaker 13

Just help us out there.

Speaker 6

Okay. Yes, I understand the question about the R and D trajectory. And in fact, the flattening is due to a different phenomenon, which is that we think that we are at scale with respect to our R and D investment in our platform. As I previously indicated, it's a substantial portion of our R and D investment and where we think that this is such an exciting space and a dynamic industry environment. We have still a lot of opportunity in terms of new discoveries, new research that we can then translate into capabilities in the platform.

Speaker 6

So we're not dialing that back, but we don't think that needs to get a lot larger. The second component of our R and D is our drug discovery organization, not so much the development portion, but the investment that we're making to come up with the next wave of molecules and the next wave after that. Same general comment there. We can't sort of manage 10 new programs a year or 15 new programs a year. And if we keep scaling up, that's where we would head.

Speaker 6

So again, we think that we're at scale in terms of the ability to discover the next wave of programs and the wave after that. So both of those pieces, we don't see a lot of need to increase. Now you correctly identified that there has been an increase in the investment on the clinical programs, but that total clinical spend is a relatively small portion of that overall R and D. We do expect that piece to go up, but the rest of the R and D base is likely to be pretty stable from here. And so that's where you get that we just don't see a large other leg up from here.

Speaker 6

Is that clear?

Speaker 13

Yes. No, that's super helpful. Thank you. And then I guess separately, on the software side. So last fall, obviously, in particular, very challenging from a funding perspective.

Speaker 13

You've commented on how that likely weighed on some of your smaller customers kind of pairing back or not renewing. As that funding environment is improving, and as more recently as China has announced new stimulus package there, Are you starting like how quickly will that turnaround where you start to get those customers that maybe didn't renew previously, they start coming back saying, okay, now we're ready to reengage. Is it pretty quickly or does it take quarters or how should we be thinking about the timing on as the environment improves, you'll start to see that as well?

Speaker 6

Yes. So to be clear, I think what we expect to happen is new companies will come to us asking to use our technology as a foundation for their drug discovery efforts. And we are seeing those inquiries. Now those companies are asking, okay, we're going after this particular target or this drug class and we like to build our company based on your technology, there's all sorts of availability of funding in those companies. Some of them are well capitalized, some of them hope to be capitalized, some of them may be capitalized in the future.

Speaker 6

And we're working with all of them and we are seeing an uptick of interest there, but it's too early to bake that into our revenue outlook. Now the companies that previously discontinued, my expectation is that they will not come back, whether they are based in China or based in the U. S. Those companies have shifted their strategy. In some cases, they've merged with other companies.

Speaker 6

In other cases, they've been acquired themselves. Or in other cases, they've shut down drug discovery altogether and they're just focusing on the prosecution of their clinical programs. So we're not assuming that they come back and become drug discovery software customers again.

Speaker 13

Understood. Thank you.

Operator

We'll move next to Joe Cantonzzaro with Piper Sandler. Your line is open.

Speaker 10

Hey, everybody. Thanks for taking my question. I had maybe a quick one on 3515. I think we've seen in the space that patient selection strategy could be really important. And Karen, I think you mentioned selecting patients with elevated replication stress.

Speaker 10

So would be curious to hear your thoughts and if you could elaborate a bit on sort of how are you thinking about going about detecting and defining elevated replication stress? Thanks.

Speaker 7

Yes. Great question. I mean, first of all, let's just say that we know that V1 inhibitors have been shown to have great efficacy in particular tumor types already. So uterine serous plastoma, ovarian cancer, really strong responses there. We do though believe that there are opportunities in solid tumors beyond those gynecological tumors.

Speaker 7

We mentioned breast cancer and other solid tumor types. As you know, we had a collaboration with MD Anderson for several years that sought to really help us understand sensitive tumor types. And we're going to be leveraging that information as we go forward with our clinical trials. As you know, we're in a dose escalation set up this year. But as we go to look for efficacy signals, we have the opportunity to leverage that information from the collaboration as well as to think about how to select patients that we think are going to be the most sensitive.

Speaker 7

So we'll be providing updates on that in the future.

Speaker 9

Okay. Thanks. That's helpful. Thanks for taking my question.

Operator

We'll move next to Chris Shibutani with Goldman Sachs. Your line is open.

Speaker 8

Great. Thank you very much. A question about the business as well as a question about the pipeline. On the business, on an annual basis, you've tended to provide some insight into the annual contract value and the number of customers that you're having there. Can you talk about how the year is progressing and your confidence in terms of that ACV trend moving one direction or another, presumably favorably given the 6% to 13% range that you've provided?

Speaker 8

And then within that, what tends to influence whether the gross margins are closer to sort of the mid-70s versus the 80% level? So if I had to explain to someone the mix of the customers and the gross margin impact on what you're seeing, how could you help me there? And then secondly, at the R and D day, Karen, at the end of last year, I think there was a little bit of buzz that emerged when you guys identified a couple of potential targets that the Street tends to perk up about. In particular, I'll mention NLRP III this year has become somewhat trendy. PRMT V also has a presence.

Speaker 8

So with those, you talk about advancing 1 into an IND in 2025. What's the horse race like? And is that purely on the domain of something that you guys would plan to take forward? Or is that something you would contemplate possibly shifting over towards a partnership there as a way to perhaps leverage costs, but still be able to get some of the carry, so to speak? Thank you.

Speaker 6

Thanks, Chris. I'll answer the last couple of questions. I'll let Kyle answer the other 5 or 6. So beginning with the ACV, we highlighted that last year revenue growth exceeded ACV growth by a significant margin and we disclosed ACV growth. And we don't break out ACV trends quarterly, but we've definitely communicated that ACV growth will be significantly higher than revenue growth this year and that was driven by the large contribution from the multi year deals in the Q4 of last year, which effectively are recognizing revenue from future years, in that case 2024, 2025 and 26 for a 3 year deal.

Speaker 6

So ACV growth this year is likely to be significantly higher than revenue growth. And that was true in the Q1. We don't sort of have an audited ACV growth number, but qualitatively it was significantly above the revenue growth. And it is consistent with what we're expecting for the full year. Now in terms of the number of customer trends, we do present that in our KPIs.

Speaker 6

I think we have confidence that the KPIs are going to trend positively this year. We don't guide to that. I don't have specific numbers to share. But you could look at the numbers that we highlighted last year and we remain pretty positive about the trajectory of those numbers this year and about their ability to contribute to us achieving the revenue guidance and by implication the ACV growth outlook that we're expecting. And then sorry, I met the other question, I knew it would take me a while to get there, gross margin.

Speaker 6

So gross margin is somewhat influenced by the contribution of multiyear deals. If we have a large software renewal that includes revenue that where we're providing the actual access to software 2 or 3 years out, then that revenue being recognized has a very high gross margin and that tends to lift the gross margin overall. Whereas in a quarter, for example, like what we most recently had, where we didn't have a lot of multiyear deals and we had a significant step up in hosted revenue, that tends to bring the gross margin down. Now we are very confident that the gross margin is going to trend positively over time. There was a little bit of an increase in technology spend that I flagged up in the Q1.

Speaker 6

But I think that overall, we're very convinced that our gross margin trend, the guidance will be similar to last year and we think that it will trend positively over time. I wouldn't be dialing in sort of substantial increase in gross margin, but we do think there's reason to think that it will continue to gradually tick up by small amounts each year. Sorry, Tara? Sure. Yes.

Speaker 6

So you're right. The NLRP3 and PRNG5 MTA have been pretty interesting

Speaker 7

over the last year with a lot of disclosures from other companies. We are excited about both programs. I think what they both have in common is that there are a number of potential indications. So NLRP-three potential obviously in Parkinson's disease as well as a number of peripheral inflammatory diseases. For PRMT5, there's opportunity in the brain tumors, but also a number of solid tumors.

Speaker 7

So we are excited to have both of these programs in our portfolio. They're both in the optimization stage. We're working hard on the optimization of multiple series. I think we described that at Pipeline Day. And one of the important features is the opportunity to leverage our platform to optimize brain penetration, which is clearly a key feature for both of these programs.

Speaker 7

And that work is underway. I think it's too early to talk about the sort of picking a horse in the race. I think we're pleased with the progress that we're seeing. And then your other question I think was whether we would develop these alone or in collaboration with others. I think both opportunities are open to us and we remain sort of open to collaboration discussion.

Speaker 7

But we also are working right now to think about indications in which we would conduct early clinical trials. So again, we'll keep you posted as we make progress with that.

Speaker 8

Thank you for all the answers to all my questions. Appreciate it.

Operator

I am showing no further questions at this time. That concludes today's call. You may now disconnect.

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